This is certainly a true statement. Prof. Warren Binford in her famous article, How to be the World’s Best Law Professor, Journal of Legal Education, Volume 64, Number 4 (May 2015), said very nicely:

“Of Course Limit Lecturing, but What about the Socratic Method?
Not by lecture. Over 700 studies have confirmed what many of us know based on our own experience as students: Lectures are among the least effective methods for achieving almost every educational goal ever identified. In fact, for some education goals, lectures have been identified as the least effective learning method. Others suggest that they may be worse than no teaching at all since attending a lecture leads to less studying afterward.”

The truth of this came home to me today. Yesterday I was sitting in the pool listening to some tv documentary on my phone (connected to a speaker). The program was on the remarkable career of one of my favorite musicians, Paul Simon. It was about an hour and I listened intently. It was very moving, walking through his struggles to get started, and his major albums, my favorite song Graceland. On my phone was the actual tv program but I didn’t watch that, only listened (didn’t check my emails even once!). This morning, during our daily walk, I was telling my wife about it. She loves Paul Simon as well. She listened intently (I think). I was surprised at how few of the details I remembered. I certainly remembered some of it and a few of the major stories but I’m sure that was about 20% of the whole thing.

So what does Prof. Binford suggest? You have to read the article. But I love her following comment:

“Let Your Students Teach
On second thought, there is at least one person in the lecture hall who benefits greatly from lecturing: the lecturer. So if you want to be ‘The World’s Best Law Professor,’ the first thing you should do is sit down and let your students go to the lectern. After all, we know that teaching generally produces the highest rate of long-term retention. Unfortunately, if one utilizes the lecture method to teach, it also yields the lowest level of long-term retention for those in the classroom—as low as five percent—so better than sending that student to the lectern, provide them with peer tutoring and other more interactive opportunities to teach and to learn from one another by participating in both roles. After all, there is considerable support for the effectiveness of collaborative learning.”

Two thoughts on this.

First, it reminds me that because I said something in class is not a reason to be annoyed when no one remembers what I said later, more than generally at best, even if I said it several times. I must be better at calling on students in class and trying to get a discussion going about the topic. I must be better at creating collaborative learning.

I have gotten better at power point but I’m trying to improve that so that students are seeing something at the same time they are hearing about it. I offer tutoring in my Business Assns class in the form of a Zoom meeting every Wednesday afternoon for 75-80 minutes. I discuss only what the students ask me to discuss so it’s a little more one-on-one but it’s still basically me talking. That helps the few students who attend. My best idea is giving a short take-home essay question after every class which must be answered and uploaded to D2L before the next class. It gives the student a chance to talk, to go to the podium, explain the couple issues in the essay, a great way to learn. And it usually leads to good discussion at the beginning of the next class.

Second, this is a long way of me telling you that you must read the cases assigned for each class. Reading by the way is almost as bad as listening as far as retaining what you read. Reading is really similar to listening to someone talk. Read the cases, then speak up in class. Question why the judge reached the conclusion she reached. Question why the ruling seems to contradict the last case we discussed. Question that the ruling makes no sense. For one thing, it makes it much more fun for me and I believe for the other students in class.

This is an email I sent to some students about my final exam in my basic bankruptcy class. In question 2, Fred the debtor owed a lot of subcontractors for work they did for him, a bank for money he borrowed to build a home, and a homeowner for a deposit that was given to him to build a house that he spent without building the house (so far at least). Hundreds of thousands of dollars in total. The issue was whether any or all of this debt would be discharged in a bankruptcy case.

Hi students,

I’ve been thinking about our conversation yesterday, especially question 2.  I think if you asked 100 people, 99 of them would tell you that it’s completely crazy to let this debtor simply walk away from all this debt.  That can’t be right!  My mother would laugh and snicker at me if I gave her this hypo and told her the guy keeps all of his property, probably continues with his life as a contractor, and walks away from the debts, by filing a few forms.    

But Congress says he can absolutely walk away.  It makes the rules.  Law school is really about learning to focus on the rules and not jump right into what’s fair and reasonable and moral and right etc. 

This guy can fill out some forms and walk away from the debts unless he committed fraud.  That’s the first rule. That what Congress said. There are no facts suggesting embezzlement, willful and malicious injury etc.  So it comes down to what’s fraud?  State the rule and then see what facts you are given to figure out if he committed fraud.  Fraud is a misstatement of material fact made to the people he owes money to; made to entice them into giving him something.  I don’t think there are any facts suggesting he cheated anyone.  Having said that, one or two in ten bankruptcy judges would deny his discharge for the reasons you all discussed in your answers.   Judges are human too.  

Anyway, that’s the lesson.  I think if you would have laid out the rule about what fraud is, then looked at the facts, you would have gotten closer to the right answer. 

One last thought, for some of you, your writing is going to hold you back, not a ton for most of you but some.  I assume it’s simply a failure to carefully review what you have written rather than a lack of skills.  But be careful with what you write.  Practice, practice, practice.  Even this email; I’ll bet I have reread it 6-8 times.  I carefully review texts I send to make sure there are no typos (which there always are some anyway of course).  In law school and on the bar exam, what you write is your entire grade.  

So good luck.  It was a fun class.  I appreciated your efforts.  JH

I have been fiddling with my material for my Fall 2023 Business Organizations class at UWLA, my 18th year of teaching the class. I decided to remind myself about which corporations qualify as “pubic companies.” A public company, to my way of thinking, is a corporation which is required file a bunch of different kinds of reports with the Securities & Exchange Commission (“SEC”). The reports require an immense amount of disclosure about every conceivable aspect of the company operations which are then available to the public, thus the public company. When Elon Musk bought Twitter, it was no longer a public company and the disclosures have stopped. The public can no longer easily see what is going on behind the curtains.

So which companies are required to report to the SEC? The answer is corporations with at least $10 million in assets and with at least 2,000 different shareholders. I wanted to make sure my memory was right and that the SEC had not changed the rule since I last looked. I needed the appropriate SEC regulation which I did not have handy.

I decided to take a short cut and did a google search of “What is a public company?” I clicked on probably ten different sites before I finally saw the SEC reg that gave me the answer. What struck me however is the number of sites that had definitions for public companies which were wrong and some very wrong. And these are sites that have at least facial credibility.

Investopedia for example defined public company as “a corporation whose shareholders have a claim to part of the company’s assets and profits.” Huh? First of all, to the extent that statement is true, it applies to every corporation. Second, I would not say that shareholders “have a claim” to corporate assets or profits. I suppose it’s true in an ultimate sense but it is misleading in any event and has nothing to do with public corporations.

A site called Britannica (and a few other sites) defined public company as “a company that issues shares of stock to be traded on a public exchange or an unlisted securities market. . . . in all cases public companies list their shares on a public market.” Shares are not “issued to be traded on a public exchange.” Shares give the owner certain rights set forth in the Articles of Incorporation. After that, the shares, with whatever rights that they have, may or may not be traded on an exchange or other market. The promoters of the corporation may have an eye to selling enough shares to get listed in some trading market but that is not what makes it a public corporation. And not all public companies “list their shares on a public market” although, obviously, many do.

Others: Masterclass.com says “A public company is an incorporated entity that sells ownership shares in capital markets.” Corporatefinancialinstitute.com says, “Public companies are entities that trade their stocks on the public exchange market. . . . The company is considered public since any interested investor can purchase shares of the company in the public exchange to become equity owners.” Many public companies’ shares are traded on stock exchanges but that’s not what makes them a public company.

The SEC website says, “‘Public companies,’ often referred to as reporting companies, are subject to reporting requirements and must file certain reports, including annual, quarterly, and current reports, with the SEC on an ongoing basis.” Thank you.

Anyway, my purpose for this blog post is to show the danger to students of doing short cut legal research on the internet. My experience is that more and more students, when it’s time to answer a law school question, simply do a quick internet search and copy and paste the first thing they find. I can usually tell immediately when the student is doing that because, first, the answer given is not what we discussed in class. Second, the rule propounded in the student’s answer is usually somewhere between partially right and completely wrong. The most common error, by the way, with website legal advice is that the website does not set forth the rule but instead explains the effect of the rule. That’s really what most people who search the internet are trying to find I assume. The statement that the shares of many public companies are traded on various stock exchanges is a true statement. But it does not tell us the rule; does not answer “what is a public company.”

We are lawyers. Most rules are blackletter statements given to us by Congress, our legislatures, or other governmental agencies. Some rules are given to us by courts. We use the rule to answer a specific question for our client. It is important that we start with the correct rule. You will rarely find the correct rule on the internet. Hopefully (although rarely in my experience), you will find the statute, the code section which is the rule.

On November 21, 2016, Tesla purchased 100% of the outstanding shares of SolarCity Corp. Tesla paid for the shares with Tesla stock, giving SolarCity shareholders Tesla stock valued at about $2.6 billion. A few Tesla shareholders sued the seven-person Tesla Board of Directors (“BOD”) for breach of their fiduciary duties. The shareholders argued in part that the shares of SolarCity were worthless when acquired, or at least worth a lot less than the amount paid.

At first blush, the business judgment rule (“BJR”) would make the court’s task easy. The directors win if they did their due diligence, i.e., made an informed decision, and there was no conflict, fraud, waste or bad faith. Suffice it to say they did a lot of due diligence.

But let’s dig a little deeper into the facts. Elon Musk was the largest shareholder of both Tesla and SolarCity owning about 22% of the publicly traded stock of each. He was also Chairman of the Board of SolarCity which he founded with his two cousins, Peter and Lyndon Rive. Elon, his brother Kimbal Musk, and one other person, Antonio Gracias, sat on both boards. Three other Tesla directors owned some SolarCity stock directly or indirectly. Hmm? Conflicts maybe? Loyalty issues?

So a huge portion of the amount paid for SolarCity went into Elon’s pocket. Other amounts went to his brother and four of the other Tesla directors. Only one Tesla director, Robyn Denholm, was completely disinterested financially.

But digging a little deeper still, this time focusing on the process of getting to the price Tesla paid, the Tesla BOD did not form a committee and did not exclude Elon from the negotiations. But it did hire an expert to opine on the valuation. Further, when it reached the purchase price, it submitted the issue to the disinterested shareholders. The disinterested shareholders approved the deal which closed the next day.

The unhappy shareholders, i.e., the plaintiffs here, argued that Elon dominated the BOD and since their directors had their own conflicts anyway (being shareholders of SolarCity), the BJR did not apply and therefore the matter must go to trial to determine if they used appropriate care, i.e., good faith business judgment and care of a reasonably prudent person under similar circumstances. They argued further that since six of the directors were putting money in their own pockets, the court must have a trial to determine if the price paid was fair to Tesla. Lastly, they argued that Elon, as a controlling shareholder, dominated the disinterested shareholders so the vote of those shareholders should carry no weight or any favorable presumption.

The crux of the matter then is whether the transaction was fair to Tesla and its shareholders. The Delaware court set the issue of care to the side at the outset. If the transaction was fair to the now-diluted Tesla shareholders, there are no damages and care would not be an issue. As to fairness, the court noted that the analysis is two-fold. It observed:

“The concept of fairness has two basic aspects: fair dealing and fair price.‘  Fair dealing (or fair process) ‘“’embraces questions of when the transaction was timed, how it was initiated, structured, negotiated, disclosed to the directors, and how the approvals of the directors and the stockholders were obtained.’  Fair price ‘relates to the economic and financial considerations of the proposed merger, including all relevant factors: assets, market value, earnings, future prospects, and any other elements that affect the intrinsic or inherent value of a company’s stock.’” The burden of persuasion lies generally with the defendants.

The court conducted an 11-day trial. In a very lengthy and detailed memorandum, it concluded that the price was intrinsically fair to the Tesla shareholders and entered judgment in favor of the defendants. As to the process, the court found that “Elon was undoubtedly involved in the deal process in ways he should not have been, but fortunately, the Tesla Board ensured nevertheless that the process led to a fair price. For example, it said no to the proposed merger twice at the outset. And Elon did not push back against them—there were no threats, fits or fights.  While involved, Elon did not impede the Tesla Board’s pursuit of a fair price.”

As to the price, it found that the price was intrinsically fair. It considered the testimony of various parties and experts and concluded the price was fait to Tesla. It commented also that “approval of a merger by disinterested stockholders is ‘compelling evidence that the price was fair.’  Here, nearly 85% of the votes cast by Tesla stockholders—largely extremely sophisticated institutional investors—were in favor of the Acquisition.”

The court therefore did not rule on the duty of care since there could not be any breach when the process getting to the purchase decision was fair, i.e., what was done was something a reasonably prudent person would have done under similar circumstances. Also again, since the price was fair, there could not be any damages.

Coley v. Eskaton (2020) 51 Cal. App. 5th 943

This is an action by a homeowner against the board of an HOA. The court awarded $2,300 in damages and $654,000 in attorneys fees! The plaintiff argued that the directors breached fiduciary duty and other claims, alleging directors approved actions of HOA for benefit of operators rather than HOA itself and homeowners. The court found directors breached fiduciary duty to HOA but declined to find directors liable in their personal capacities. The court of appeals reversed saying:

1 directors failed to establish HOA transactions were fair and reasonable;

2 directors had personal financial interest in transactions they approved that was distinct from interest of HOA members generally; and

3 directors breached fiduciary duty to HOA members by approving transactions in which they had material financial interest and which were not inherently fair to HOA and its members.

As to the BJR, theopinion says:

B. Application of the Business Judgment Rule

1The defendants’ next claim the court misapplied the business judgment rule. The business judgment rule is a policy of deference to a corporate board’s decisionmaking. (Lamden v. La Jolla Shores Clubdominium Homeowners Assn. (1999) 21 Cal.4th 249) But the trial court here found the rule inapplicable because the Eskaton entities’ employees who sat on the Association’s board had an “irreconcilable conflict of interest” that “preclude[d] the business judgment rule as a defense to liability in this case.” According to the defendants, rather than finding this conflict precluded the business judgment rule altogether, the court instead should have afforded the defendants an opportunity to reclaim the benefit of the rule by showing they acted in good faith after reasonably investigating material facts. We view the law differently.

1. Background law

California recognizes two types of business judgment rules: one based on statute and another on the common law.  Corporations Code section 7231 supplies the relevant statutory rule for nonprofit mutual benefit corporations like the Association. Under that statute, a director is not liable for “failure to discharge the person’s obligations as a director” if the director acted “in good faith, in a manner such director believes to be in the best interests of the corporation and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.” (Corp. Code, § 7231, subds. (a), (c).) The common law business judgment rule is similar but broader in scope. It is similar in that it immunizes directors for their corporate decisions that are made in “good faith … to further the purposes of the [corporation], are consistent with the [corporation’s] governing documents, and comply with public policy.” (Nahrstedt v. Lakeside Village Condominium Assn. (1994) 8 Cal.4th 361, 374) And it is broader in that it also “ ‘insulates from court intervention those management decisions’ ” that meet the rule’s requirements. (Lamden, supra, 21 Cal.4th at p. 257.)

45A director, however, cannot obtain the benefit of the business judgment rule when acting under a material conflict of interest. Deference under the business judgment rule is premised on the notion that corporate directors are best able to judge whether a particular transaction will further the company’s best interests. (Gaillard, supra, 208 Cal.App.3d at p. 1263, 256 Cal.Rptr. 702.) But that premise is undermined when directors approve corporate transactions in which they have a material personal interest unrelated to the business’s own interest. And it is particularly undermined when a majority of these directors approve transactions while having a material conflict of interest. Under those circumstances, the directors carrying this conflict of interest are precluded from seeking the benefit of the business judgment rule. (See Everest Investors, supra, 114 Cal.App.4th at p. 430, 8 Cal.Rptr.3d 31; Gaillard, supra, 208 Cal.App.3d at p. 1263, 256 Cal.Rptr. 702.)

678But although the business judgment rule is inapplicable under these circumstances, that is not to say that corporate decisions affected by these types of conflicts are improper as a matter of law. As with the business judgment rule generally, statutory and common law requirements are again relevant in this context. Corporations Code section 7233 supplies the relevant statutory rule. It provides, among other things, that an interested director who casts a deciding vote on a transaction must show the “transaction was just and reasonable as to the corporation at the time it was authorized, approved or ratified.” (Corp. Code, § 7233, subd. (a)(3).) Section 7233, however, only applies to transactions “between a corporation and one or more of its directors, or between a corporation and any domestic or foreign corporation, firm or association in which one or more of its directors has a material financial interest.” (Corp. Code, § 7233, subd. (a).) The common law rule, as before, is similar but broader in scope. It is similar in that it requires interested directors to “prove that the arrangement was fair and reasonable”—a rigorous standard that requires them “ ‘not only to prove the good faith of the transaction but also to show its inherent fairness from the viewpoint of the corporation and those interested therein.’ ” (Tenzer v. Superscope, Inc. (1985) 39 Cal.3d 18, 31-32, 216 Cal.Rptr. 130, 702 P.2d 212 (Tenzer).) And it is broader in that, unlike Corporations Code section 7233, it is not concerned only with transactions between a corporation and either its directors or a business in which its directors have a material financial interest. (See Corp. Code, § 7233, subd. (a).) Rather, recognizing the potential for self-dealing may also exist outside this particular context, courts have found directors must also satisfy the common law requirements when they approve other transactions in which they have a material financial interest distinct from the corporation’s own interest.

Sorry I forgot to upload the essay for next Tuesday. I’m out of town now and can’t upload it now. So no essay for this week.

I posted the short essay on D2L. See you then.